12 June 2012

Financial Crisis Sliced Wealth and Income

The median family, richer than half of the nation’s families and poorer than the other half, had a net worth of $77,300 in 2010, down from $126,400 in 2007, the Fed said. The crash of housing prices explained three-quarters of the loss.

This vast loss of wealth was compounded by a loss of income, as the earnings of the median family fell by 7.7 percent over the same period.

So, the median family wealth in the United States was down about 40% as a result of the financial crisis (thirty percentage points from reduced housing prices and the balance from reduced wealth of other kinds), and the median family income was down 7.7%. Two decades of wealth creation were wiped out.

The fact that the financial crisis would have a wealth reducing effect was apparent immediately. The fact that it would so dramatically affect median family, rather than having a greatly disproportionate impact on the very affluent, was not.

Recovery to pre-crash levels of income, employment, and wealth continues to be something that will not happen for many, many months, although one can argue that using a bubble inflated false level of wealth from 2007 is an inappropriate benchmark for a recovery.